Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Health (and Retirement) Savings Accounts: Steps To Lifelong Health Insurance
If you are a fast reader, we will begin with a ten-minute summary of Health Savings Accounts. At first, it covers future revenue, then spending projections follow. No matter how medical care changes, cost and revenue must remain in balance.

The Plan

It is time to present an outline of the proposal for replacing the Affordable Care Act with a cheaper payment design, owned by the subscriber himself. We first described its chief obstacle, paying for transition to it, not just because the proposal has to be shaped around that obstacles solution. It quickly becomes apparent people are so incredulous about overcoming a century-long year transition, they lose interest in details of it. Essentially, the solution consists of borrowing from trust funds after death, or possibly in anticipation of birth. This in turn generates income from extending the period of compound interest, which actually increases with a longer time period. Once it is accepted the protracted transition can be shortened into reasonable time periods, people are more willing to look at the overall proposal..

Most health insurance depends on overcharging healthy young people, using that accumulated surplus to pay for expensive old folks. Because people often change jobs, it becomes difficult for employer-based insurance to do that, so employer control of the system depends on the contortion of giving insurance as a gift to the employee. That allows the employer to set the terms, while increasing funds with a tax deduction. This questionable approach is only tolerated because it works, and nothing else seems to. However, in the long run it increases costs, and we are reaching the point where it has to end. With a plausible transition, we can at least look at alternatives.

The beginning of earnings happens to coincide with the least expensive period of life, around age 25. Children can get expensively sick, but someone has to give them the money for it. The period from childbirth to age 25 is a sort of no-man's land, neither self-supported nor assuredly funded by solvent parents. So let's assume children's health costs are donated by someone else, and the system really starts with approximately the 26th birthday. With the first paycheck, the new employee begins to contribute 3% of his earnings to Medicare. That's right now, and the employment period lasts approximately until the 65th birthday, followed by 20 years of Medicare premiums, until age 85, the present life expectancy. We suggest the payroll tax be paid into the individual's Health Savings Account instead of the Medicare "Trust Fund". If Congress would permit it, it would generate much more money if the premium expectancy were paid first, followed by forty years of the payroll deduction. That leaves 21 more years for a postmortem Trust Fund to make up any difference caused by starting later than at birth, reducing the implicit debt by 75%. Any surplus can be used for retirement purposes, any deficit remaining at age 104 can be written off. A table will show this system could supply ample funds for Medicare , and a variable amount for retirement. There are five special considerations, more or less optional in timing a phase-in:

1. Scientific Attrition of Healthcare Costs. We presently experience a period when new curative drugs costing pennies to manufacture, are being sold for eighty thousand dollars per treatment. Presumably this will be a brief period because no government can tolerate it for long. After turmoil is overcome, we can expect a series of scientific discoveries will eliminate many health costs, often preceded by a brief period of raising them, first. It may be tumultuous, but the eventual outcome will be substantial lowering of before-inflation costs of medical care. It might require a century, although probably will be considerably sooner, before we see health costs approaching those of the first-year and last-years of life. Executives of pharmaceutical companies may have other plans, but I have confidence in scientists' love of fame, driven by thirty or forty billions a year of research dollars, to sweep contrary trends aside. In the coming century, you can share my confidence that after-inflation health costs will come down. It will be up to Congress to be sure such savings are retained within the health system, and not spent on battleships, or new substitutes for sickness care.

2. Not a Single-Payer System, but Pearls on a String, Linked by Escrowing. This is essentially the same problem the Constitutional Congress faced in 1789. One side justifiably wanted a powerful central government for taxes and defense. In time, the central government was given a few enumerated powers by the Tenth Amendment to accomplish these goals, but everything else remained locally controlled. The dual problems were resolved with a dual ("federalized") system, which lasted 80 years until slavery and the Civil War broke it apart. Applying the same principles to Healthcare financing faces the same sort of issue, with the major difference that Healthcare financing is destined to get easier in spurts, constantly illustrating hope for the future. What holds it together is escrow a binding agreement to do what you promised unless some third party custodian decides you need an exception. The present four components are held together by escrow accounts, each ship on its own bottom, with a court system to allow for occasional special circumstances for one component to subsidize another. Other entities could add pearls to the necklace as desired. It has its fragilities, but it ought to last a century. If it doesn't seem to be working, a single payer's flaws can still be re-examined. But that's why we must wait to see what Obamacare really costs, with subpoena power to be sure the data reflects the complexities. The working age population in ACA really ought to produce surplus revenue, but indications are it wants to be subsidized. For the present, approximately revenue-neutral would suffice.

3. Component-shifting, Replacing Hidden Cost-shifting. The lifetime cost curve of healthcare is J-shaped from birth to death. Both the balancing problem and the revenue solution revolve around keeping revenue and cost manageably in balance at each stage, so transfer systems are minimized, not exaggerated. As a generalization, our proposal depends on moving payment compartments to other stages of the J-shaped curve. Obsterical-pediatric costs are shifted from the mother to the child. The child's cost is shifted to investment-overfunded Medicare; male-female costs are equalized by removing them from the mother. The overall effect is to transfer obstetrical/childhood costs from single mothers and employers to Medicare (from the far end of the J-shaped curve to the opposite end), which is overfunded by the tail end of the compound interest curve. It's inevitably a little lumpy, and the final result must be smoothed out with the familiar tricks of accountants. It may seem difficult to persuade a dozen industry executives to shift business components like checkers, but it's a whole lot easier than persuading millions of customers to rearrange their health insurance habits. The new source of revenue is investment income from the currently indolent revenue stream , so there's considerable extra revenue to pacify a few losers.

The specifics are: transfer obstetrics/pediatrics from mother to child, donate that cost (supposedly $18,000) at birth to the Health Savings Account of the child, and eventually to his Medicare voluntary buy-out escrow at age 65. Any surplus is used for retirement, less buy-out costs for last-year of life re-insurance and childhood costs. (By the way, I bet we will find it doesn't cost $18,000 to bear and support a child; much of that big-ticket cost must be cost-shifted accounting maneuvers for malpractice, bad debts, etc.)

4. Computers: Finance Industry Suffers, Amateur Investors Prosper. Burton Malkiel showed a Random Walk Down Wall Street was mostly superior to the sharp-pencilled judgment of experts, while John Bogle made economy-wide investing a practicality, with index funds. Adjusted for fees, it was pretty hard for an investor to improve on low-cost total market index funds, just buy 'em and forget 'em.

Bogle's funds now total in the trillions of dollars, still growing fast, with only the crooked ones left to worry about, although the year you were born and the year you happen to die will affect the result beyond anyone's control. Otherwise, this approach will suddenly give millions of people superior results cheaply. When you compound the results for most of a century, a few tenths of a percent difference in return make a big difference in final outcome.

On the other hand, risky investments offer higher returns, so total market index funds must be chosen with care. The narrow index funds, by industry for example, are not what we are describing. Our present calculation is that a steady 6.7% average return will suffice for a medical lifetime. Professor Ibbotson of Yale reports the stock market has averaged 10-11% for the past century, and inflation has averaged 3%; the result is 8% real return to be split between Wall Street and the investor, When you consider who is taking what risk, the investor has a reasonable argument he deserves (but often does not get) 6.7%. And when you observe the violence with which lobbyists reject mandatory fiduciary (the customer's interest ahead of the intermediary's) relationships where 1% is at stake, it won't be an easy settlement.

5. First Year and Last Year of Life Re-insurance. Two things make this transition idea possible. Not only is 50% of health cost concentrated in Medicare, but 50% of that is concentrated in the last four years of life. Secondly, the two halves of Medicare revenue stream can be separated by paying cost components into different escrow funds, re-united after death and/or borrowed, as seems expedient.

Effectively, this can remove half of Medicare cost from the main stream, and it's the half which will shrink from scientific advances of the future. The terminal care half is more resistant to shrinking, is payable after death, and therefore puts less pressure on transition, demanding expediency only for half the costs. Essentially, this dual approach is an alternative or supplement, to Postmortem Transition Trust Funds. If both methods are employed, the transition phase can be considerably shortened. If half of Medicare cost is already "in the bank", it should also reassure many older subscribers of its safety.

It's presently difficult to know what to do with First Year of Life Insurance until we are more certain of its real cost. It's held in reserve until we can judge what its urgency is.


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